Pepe Pizza, Inc. Capital Budgeting Project Case: The following projects need to be evaluated (using the Capital Analysis provided below) to help the owners make the best financial decision for Pepe Pizza based on the expected returns for each project. What do the calculations show for each project, so Pepe's can make a decision? Does Pepe's Pizza have sufficient financial and management resources for the projects? If not, what cost of financing options do the owners have so that they may engage in the selected capital projects? You can recommend more than one project, if it is financially appropriate. Be sure to explain what the numbers mean to a layperson. Be sure to share the importance of the metrics for decision-making.

Capital Analysis to be used for assessment:

Project 1: Menu Expansion Project: Pepe Pizza has an established restaurant that serves pizza, grinders, and fried side orders. There is limited available space for any additional equipment, but some items such as a panini press and grill costing $12,000 would be needed. It is expected that the project will have a life of 5 years at which time the company will reconsider its options. Additional sales due to the expanded product line are expected to be $1,000/month. The cost of goods sold is expected to be $700. Sales are expected to grow for the first three years before leveling out as the company reaches maximum market penetration. Project 2: Geographic Expansion Project: Pepe Pizza would have to rent additional retail/restaurant space in the geographic area selected. Equipment costing $95,000 would be needed and rent is $3,500 per month. It is expected that the project will have a life of 10 years at which time the company will reconsider its options. Sales at the new location are expected to be $6,000/month. The cost of goods sold is expected to be $2,700. Sales are expected to grow for the first three years before leveling out as the company reaches maximum market penetration.

Project 3: Pizza Oven Manufacturing Facility Project: Pepe Pizza would have to rent factory space to manufacture the energy-efficient pizza ovens. The facility would have the capacity to produce 12,000 units per year. Equipment costing $95,000 would be needed and rent is $7,500 per month. It is expected that the project will have a life of 10 years at which time the company will reconsider its options. The ovens will have a list price of $15,000. The cost of goods sold is expected to be $8,700 per unit. Sales are estimated to be 900 units in the first year but are expected to grow for the first five years before leveling out as the company reaches maximum market penetration.

Additionally, for this project sales are adjusted for costs associated with operating the manufacturing plant including machinists, sales, and office operations staff. Cash flows have been added to the Excel workbook. Cost of Finance Pepe Pizza has a corporate cost of capital of 9% which will be used to evaluate both the Menu Expansion Project and the Geographic Expansion Project because of their similarities with existing Pepe Pizza. The Pizza Oven Manufacturing Facility Project cost of capital will be 12% to reflect higher project risk due to Pepes lack of experience in the new industry. The policy of Pepe Pizza is to fund all growth with retained earnings and debt only. There is no public equity as the owners of Pepe's wish to maintain control over the business. They have $75,000 in reserve available for funding these projects.

\begin{tabular}{|l|l|l|} \hline & Rates of Return \\ \hline Option 1: Menu Expansion Project & 9% \\ \hline Option 2: Geographic Expansion Project & 9% \\ \hline Option 3: Pizza Oven Manufacturing Facility Project & 12% \\ \hline \end{tabular} \begin{tabular}{|l|r|r|r|r|} \hline & \multicolumn{1}{|c|}{ NPV } & \multicolumn{1}{|c|}{ IRR } & PAYBACK PERIOD & \multicolumn{1}{|c|}{ PI } \\ \hline Menu expansion & 3424.954174 & 19 & 3.14 & 1.29 \\ \hline Geographic expansion & 147072.1056 & 28 & 3.45 & 2.07 \\ \hline Pizza oven manufacturing facility. & & & & \\ \hline \end{tabular} \begin{tabular}{|l|l|l|} \hline & Rates of Return \\ \hline Option 1: Menu Expansion Project & 9% \\ \hline Option 2: Geographic Expansion Project & 9% \\ \hline Option 3: Pizza Oven Manufacturing Facility Project & 12% \\ \hline \end{tabular} \begin{tabular}{|l|r|r|r|r|} \hline & \multicolumn{1}{|c|}{ NPV } & \multicolumn{1}{|c|}{ IRR } & PAYBACK PERIOD & \multicolumn{1}{|c|}{ PI } \\ \hline Menu expansion & 3424.954174 & 19 & 3.14 & 1.29 \\ \hline Geographic expansion & 147072.1056 & 28 & 3.45 & 2.07 \\ \hline Pizza oven manufacturing facility. & & & & \\ \hline \end{tabular}